I'm a Fellow at the Adam Smith Institute in London, a writer here and there on this and that and strangely, one of the global experts on the metal scandium, one of the rare earths. An odd thing to be but someone does have to be such and in this flavour of our universe I am. I have written for The Times, Daily Telegraph, Express, Independent, City AM, Wall Street Journal, Philadelphia Inquirer and online for the ASI, IEA, Social Affairs Unit, Spectator, The Guardian, The Register and Techcentralstation. I've also ghosted pieces for several UK politicians in many of the UK papers, including the Daily Sport.

Beware Groupon

Now that the Groupon IPO is both out of the way and the stock is back down to around the IPO levels, perhaps it’s time to actually ask whether there is a real business there at the heart of it all.

I’m not referring to their interesting attempts at creative accounting, the levels of the stock, whether or when insiders will start to sell nor even the quality of management and execution. I’m interested in a much more fundamental point, is what they do something that businesses are going to continue to buy?

You might think that a strange question, for it’s the consumers who actually buy Groupons. Yes, of course, it is, but they’re not the real customers of the firm. Those real customers are the businesses that make the offerings which Groupon then sells to consumers. If businesses decide they no longer want to offer Groupons then it doesn’t matter how large the email list is, there’s just not a business there.

My musing is prompted by two little stories, one in the press and the other personal. The one in the press is a small business in England that lost a year’s profits through offering a Groupon:

Need a Cake owner Rachel Brown told how Groupon nearly crippled the business after the company that initially created the Need a Cake website was approached and struck up a deal.

It was agreed that 1,000 vouchers would be made available between February and July this year for 12 cupcakes for £6.50 with Need a Cake taking £2.20 and Groupon pocketing the rest.

But the offer was released days earlier than planned and began appearing in other regions across the UK and up to 9,000 people snapped it up, leaving the business snowed under.

Mrs Brown said: “We had a lot of trouble with Groupon and it nearly finished us. The whole thing was a total fiasco.

The normal price of 12 cupcakes appears to be £26. You don’t need to be a miracle accountant to see that there are very few businesses indeed who can offer a 90% off deal on a physical good, something which has real costs associated with its production.

It might be possible to do a limited offering as a loss leader, yes, but that’s in itself a terribly risky undertaking. For there’s no guarantee at all that any of the Groupon purchasers will come back. Indeed, if you read the comments here you’ll see that having tried it out, many are convinced that it’s all loss and no leader.

Perhaps this is limited to the UK and isn’t representative of other territories. Could be, I don’t know. However, let me add the little personal experience. I’m involved with a golf association: we negotiate to get our members money off green fees in the area where I live (no, no link to it, this isn’t an ad for it). The more members we have the better the prices we can get: the marginal cost of a new member is the cost of printing his membership card. We’re a not for profit but we are exactly the sort of business that can, indeed would welcome doing so, support the huge discounts that the social marketing model needs. 75% off to get a few hundred new members? Sure we would.

Yet when going around the various companies (not just Groupon you understand) we found that no one really wanted to take on the offer. There’s a very definite preference for offering physical goods rather than these sorts of services. OK, that’s fine, that may well be just a reflection of consumer preferences.

But that’s where the problem is then: consumers don’t want to buy and the social marketing companies therefore don’t want to sell exactly the sort of offers that can actually profit from the deep discounts the system requires. While consumers do desire to buy, the companies to offer, the sort of physical goods deals that cannot be long term offerings for they cannot support that discounts demanded.

In more jargony terms, social marketing is just great for producers with fixed costs and near zero marginal costs. It’s terrible for those with more than trivial marginal costs. Yet what people desire to buy and what the companies desire to sell, are those offerings which have more than trivial marginal costs and which cannot, long term, afford the discounts. Which is, I think, something of a problem for the basic business model.

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